jpod

Can you give us an example of when an impermissible benefit is "indirectly" conditioned upon the election to contribute that can be distinguished from this scenario? I'm not saying you can't, but I can't think of one.

Arguably, it is broad enough to include, "I will cover your taxes if you contribute but then have to take a taxable distribution because of an ADP failure," but as I said that is a conservative interpretation and maybe or maybe not warranted.

Well, maybe, but the original post states as a fact that a plan existed. My point was that it is irrelevant whether a plan exists now or not because if there was a hidden asset that should have been taken into account the parties can agree to whack it up any way they wish.

I stated at the beginning that I thought this was a concern only if one is very conservative. Yet, it's a bit of an open question and I wasn't anxious to attempt to provide an answer on a message board.

What difference does it make if there is currently a plan or not? If at the relevant time there were additional $XXX floating around which the husband "forgot" about, she may be entitled to a piece of that. It's irrelevant that it was a qualified plan and equally irrelevant if that plan no longer exists.

This is not a benefit, right or feature issue. The contingent benefit rule in the reg which KEC9 cited is very broad and definitely encompasses benefits provided OUTSIDE the plan. The issue is whether this scenario is shoe-horned into that prohibition.

No, that's ridiculous. Maybe she's a lousy client and divorce attorney is trying to ditch her.

There cannot be another owner if he is "taxed as a sole proprietor."

You are missing nothing. She should be talking with her divorce lawyer, or if she didn't use a lawyer she should find one. She has no need for an ERISA lawyer at this juncture, if at all.

I'm guessing there are no employees and this is a retail solo plan set-up with no on-line election capability.

This LLC is a disregarded entity; it does not exist for tax purposes and the owner is treated as an unincorporated sole proprietor. So, please enlighten us: to whom should he be conveying his election? Don't get me wrong; he should probably write a letter addressed to the LLC expressing his "election," sign it and date it and stick it in a drawer, but let's be real here, this is a complete fiction. This scenario was intentionally side-stepped in the regulation you cited.

This may be a very conservative concern, but could it possibly be an "other benefit" problem, i.e., a cash payment conditioned upon the employee making elective deferrals? In other words, but for the elective deferrals being made at the level necessitating a refund, there would be no tax bonus.

It couldn't hurt to complete some sort of "deferral election," but it's a complete fiction in this context and if it hadn't been done I would be prepared to make the case before an IRS auditor that a sole proprietor can still have a good deferral election simply by writing a personal check for deposit to the plan.

What, for tax purposes, is the employer entity that maintains the 401k plan? A corporation, partnership or unincorporated sole proprietorship? Unless it was an unincorporated sole proprietorship there is no argument to be made in support of this having been a 2016 401k elective deferral.

If it is an S Corp for tax purposes you ignore the K-1 and use only the W-2. With all due respect you need to be more certain than just "I believe."

Not necessarily all keys. For example, two owners plus one or more highly paid employees who are not officers.

Just curious, but what is the arrangement whereby he gets a 1099? Who is the payer filing the 1099? Does he sell fish or his services, and if it's services how is he an IC? Sounds fishy to me.

How are there any non-owners who are HCEs in the first year?

Is there a top 20% election in effect and if so even with that there are still associate HCEs?

For so long as they intend to maintain a plan that gives employees an elective deferral opportunity, as a practical matter they can't terminate that plan. Also, although I don't think the regulations address this, I would be nervous about the application of the predecessor plan rule if that plan was ever merged into the new plan. So, if a fresh vesting clock is important, the employer will have to play by the rules and maintain two separate plans.

Yes, the predecessor plan rules would kick in if the existing plan was terminated within five years after the new profit sharing plan is established.

Skinning the cat by adopting a separate profit sharing plan is a perfectly legitimate option here. I agree that the demographics need to be right to justify the added expense, but if they are I think the employer's motivation to start the vesting clock all over again makes sense.

EPCRS is a available to ERISA-exempt church plans.

We don't know why, but I assumed it's a plan with employee-only contributions.

Technically, no. The plan is either subject to ERISA or not, and based on what you said I will assume that it is not. (I am sure someone else will suggest that maybe it is not a safe assumption, but I am not going to get into that.) However, the employer would be wise to "withdraw" the filing in some fashion. I don't believe there is any procedure for doing that, so I would write a letter to DOL, certified mail/return receipt requested, telling it that the filing was a mistake, and why it was a mistake. That will at least create a paper trail.